Broadway Decades and the New Finance

By Fredrik Erixon, Senior Director of Brussels based think tank European Centre for International Political Economy, October 17, 2020 As the United States prepares to reconstruct its infrastructure, it will turn to countries around…

Broadway Decades and the New Finance

By Fredrik Erixon, Senior Director of Brussels based think tank European Centre for International Political Economy, October 17, 2020

As the United States prepares to reconstruct its infrastructure, it will turn to countries around the world to emulate their national responses to bring new support to disaster-hit communities.

Estimates of infrastructure losses in Japan after the 2011 earthquake and tsunami range from around $400 billion to over $1 trillion, and not all of the damage was caused by the tsunami itself.

However, only a minority of the families who lost everything received any compensation. Many were either squatters displaced from the coast or unable to quickly transfer the title to the homes they used to occupy.

When I visited Japan in September, there were no plans to reimburse them. While it has not been our policy, we have often heard those affected say “never again.”

Our roads, bridges, power grid, and urban infrastructure in the EU take a lot of our time to build. They also cost us a lot of money — in the EU, the annual investment in infrastructure is about 2.2% of GDP.

That is where we should focus our next generation of investment. Without close scrutiny of cost-benefit calculations, we never see where the money goes. One study we conducted last year revealed that 72% of the growth in GDP on European investment between the 1950s and 1990s comes from infrastructure projects built over a hundred years ago.

One major example is France’s Channel Tunnel. It is absolutely critical to our country’s economy.

The sheer volume of trade between the United Kingdom and France demonstrates just how important it is. In 2010, French imports from the UK topped UK imports from France by a factor of six, as well as larger totals for Germany, Italy, Spain, and Belgium. Currently, the U.K. is the number one destination of French exports.

What is we miss, though, is the huge potential of trying to design a seamless national highway or rail link to reduce the movement of goods by land.

Low-cost internal transport has played a huge role in the UK’s industrialization. It was when French and English railway companies began co-operating that we were able to break the back of these slave-trading economies.

This was the period where Germany, at least, became a major success story for the EU. Unwittingly or not, Europe built a network of continental railways that did far more than cheap trade. They showed the kind of efficiency that we expect from European infrastructure today.

The EU’s rail and road motorways are the envy of the world, with streamlined rules that require little modification of trip time and parking fees that are cheaper than the p&l in the U.S. You can be sure a similar network would be rolled out in the EU if we could just get over how little we spend on infrastructure.

Sadly, for all our advances, high-speed trains remain stubbornly unreliable. In a critical link in the P&L chain, it may cost 40 percent more to send a Lufthansa to Düsseldorf than it does to fly from Germany to London (see graph below).

Only a handful of countries have that financial commitment, and they cannot rely on either taxpayers or profits to make up for the shortfall. We can solve this problem if we focus on high-speed rail and cross-country runways and reduce the huge costs to freight of the costlier carbon-adapted longhaul flights and tight schedules.

That is our real current infrastructure challenge. High-speed rail and airports are not nearly as expensive as we make them.

It is time to look beyond the wheelhouse of our industry and set out a strategy to deliver on the true cost-benefit of infrastructure for Europe and for the global economy.

The research that my colleagues and I presented last week to the European Commission recommended some significant changes in how the EU manages infrastructure spending. Some ideas were not new, but they were much needed.

Tax rates for construction and outsourcing should be reduced. There should be better coordination of the EU’s electricity generation. In the last few years, Europe’s public services have been struggling with budgetary restraint. One of the great failures of the Common Agricultural Policy was the lowering of taxes for farmers.

We also need to go beyond infrastructure finance and invest in research and development. Europe needs to abandon its technological apartheid. Only with a more competitive regional supply base can we grow high-tech industries that will in turn power a sustainable European future.

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